Dividend Challengers Conquered By Dow Dogs In May

by: Fredrik Arnold

David Fish publishes his updated Dividend Challenger profiles here in a Seeking Alpha monthly. David's dividend challengers are distinguished as companies that have paid higher dividends for 5 to 9 straight years.

Dogs of the Index Metrics Cull Out Current Bargains

Given the Dividend Challengers, this article used two key numbers to rank those stocks: (1) stock price; (2) annual dividend. Dividing the annual dividend by the price declared the percentage yield by which each dog stock was ranked.

Historically, investors utilized this ranking system to select portfolios of five or ten stocks in any one grouping to trade. They optimistically awaited the results from their investments in the lowest priced, highest yielding stocks and prayed that the price of every stock they now owned climbed higher (having locked in a high yield percentage at purchase).

Dogs of the Index strategy, popularized by Michael B. O'Higgins in the book "Beating The Dow" (HarperCollins, 1991), revealed how high yielding stocks whose prices increase (and whose dividend yields therefore decrease) can be sold off once each year to sweep gains to reinvest the seed money into higher yielding stocks in the same index.

Classic Dogs of the Index theory trades selected Dow stocks. Thus, the Dow is used as a standard of comparison to conclude this article.

The top thirty dividend challenger stocks listed below were ranked by yields calculated as of May 31.

Dividend Challengers

Ten challenger dogs posting the biggest dividend yields in May included firms representing three of nine market sectors. The top stock Dynex Capital Inc. (NYSE:DX) was one of three in the financial sector. The other financial firms in the top ten were: PennantPark Investment Corporation (NASDAQ:PNNT); Triangle Capital Corp. (NYSE:TCAP). The balance of the top ten included one service, StoneMor Partners LP (NASDAQ:STON), and six basic materials firms, Exterran Partners LP (EXLP); Vanguard Natural Resources LLC (NYSE:VNR); Natural Resource Partners LP (NYSE:NRP); AmeriGas Partners LP (NYSE:APU); Boardwalk Pipeline Partners LP (NYSE:BWP); Transmontaigne Partners LP (NYSE:TLP), representing market sectors.

Up and Down Moves for Dividend Challenger Dogs

The past four months, Dynex Capital Inc. claimed the top yellow tint at the top of this list by yield. Color code shows: (Yellow) firms listed in first position at least once between February and May; (Cyan Blue) firms listed in tenth position at least once between February and May; (Magenta) firms listed in twentieth position at least once between February and May; (Green) firms listed in thirtieth position at least once between February and May. Duplicates (if any) are depicted in the color for highest rank attained.

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Bullish upward price moves since April 27 were made by only one top ten dividend challenger stock: Triangle Capital Corp recorded a .296% price gain.

Bearish downward price moves for the same period hit the rest of the top ten challenger dogs: Top dog Dynex Capital posted a 1.28% price drop; PennantPark Investment Corp. inked a 7.23% price decline; Exterran Partners LP notched a 10.2% price decline; Vanguard Natural Resources carved a 16.29% price retrenchment; Natural Resource Partners dug a 6.94% price hole; StoneMor Partners LP etched a 5.1% loss; AmeriGas Partners LP dropped 5.07% to return to the top ten by yield; Boardwalk Pipeline Partners LP flowed out a 5.6% decline; Transmontaigne Partners LP declined 7.53% in price to become number ten of ten by yield.

Dividend vs. Price Results Match Challengers vs. Dow

The graphs below show relative strengths of the top ten dividend Challengers index stocks by yield and price from February to May along with those of the Dow Index. Using four months of historic projected annual dividends from $1000 invested in the ten highest yielding stocks each month and the aggregate single share prices of those ten stocks created the data points for each month (shown below in green for price and blue for dividends).

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Conclusion: Challenger Dividends and Price Rise While Dow Dividends Stay Steady as Price Pops

This Challengers collection of stocks by yield showed a 7.7% pop in projected dividends from $1k invested in each of the top ten stocks while their aggregate single share price also inclined 12.96% in May. A mixed message of bearish dividends accompanied by bullish price movement was heard.

The Dow index, on the other hand, saw the dividend from $1k invested in each of the top ten stay at the $400 level, while the aggregate total single share price jumped 5.74% to exceed dividends by $70.50, signaling an increasingly overbought condition for the month.

The Challengers index showed 139.8% higher dividends from an aggregate single share price 52.02% lower than that of the Dow

Conclusion Two:

Challenger Dogs Bow to Dow 2.69% to 6.68% in 2011 to 2012 Gains as of June 1

The results from annual investments in the lowest priced, highest yielding stocks in these two indices resulted in Challenger gains losing out to those of the Dow. The box score (shown below) shows Challengers net gains swamped by those of Dow dogs by nearly $400 or 4% from $10k invested since June 1, 2011.

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The challenger index sale of Omega Healthcare Investors, Inc (NYSE:OHI) and Enbridge Energy Partners LP (NYSE:EEP) shares for gains, failed to offset losses from sales of Telefonica S.A (NYSE:TEF) and United Community Bancorp (NASDAQ:UCBA) at June 1, 2012 closing prices. In comparison, Dow dogs counted two sales of Intel Corporation (NASDAQ:INTC) and Kraft Foods Inc (KFT) for gains as of June 1.

Net returns were calculated by adding all the actual dividends paid by the top ten dogs in each index plus stock sale gains minus brokerage fees of $10 per trade for securities sold off.

Stay Tuned

At the end of each month, a summary concludes this series of articles showing results of yield and price for the Russell 50, Dividend Achievers, the Carnevale Power 25 and new Super 29 indices, along with David Fish's Champions, Contenders, Challengers, and Composite lists. Stay tuned to follow these intrepid dogs.

Disclosure: I am long T, VZ, INTC, JNJ, CVX.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article (except as noted) are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding or selling same.